Two reports in the Financial Times could almost be described as illustrative of the glass being half full or half empty. Both articles cover the energy markets of the Middle East but the first bemoans the perilous state of energy supply in many Middle East markets. Decades of extremely low energy prices have embedded a culture of waste and inefficiency that makes energy use per head of population some of the highest in the world. In addition the area has actively developed energy intensive industries such as aluminum smelting on the back of what was considered low cost limitless power supplies. Finally population growth has been relentless. The region’s largest economy, Saudi Arabia, is growing at 2.38% per year according to middle-east-online and 60% of the population is under 40, seeking jobs and demanding industrial development.
Like the rest of the region, Saudi Arabia is rapidly consuming more and more of its own production of oil and gas just to feed rising domestic demand. Khalid al-Falih, the chief executive of Saudi Aramco, the state oil company, recently warned that unless Saudi Arabia tackles inefficiencies in the way it uses energy, the kingdom’s availability of crude for export risks falling by as much as 3m barrels by 2028 to 7m barrels a day. He said that Saudi Arabia’s domestic demand is expected to rise from about 3.4m b/d of oil equivalent in 2009 to approximately 8.3m by 2028. The company is pouring money into exploration of new natural gas fields even though it has the region’s fourth largest reserves; drilling has started in the Red Sea and in the remote Empty Quarter. Although no finds have been made yet, Aramco expects to ramp up current natural gas production at existing fields from 10bn cubic feet a day to 15.5bn cu ft a day in 2015.
With the exception of Qatar, which is coming to the end of a 20 year investment program and now has the capability to move 77 mm tons of LNG per year, much of the rest of the Middle East is scrambling to develop existing reserves or identify new ones. Unfortunately new undeveloped fields are mostly sour gas like Abu Dhabi’s Shah filled that ConocoPhillips has just pulled out of as the gas price has collapsed at the same time as the US$10bn development costs have been identified.
The second article tackles the issue of gas supply in the gulf from more of a short-term perspective. In addition, the impact of the low gas prices in the region is exacerbated by the massive rise in reserves in the US following the success of shale gas development. The price of natural gas has fallen from a high of $13.70 per million British thermal units (mBtu) in July 2008 to lows of $2.75 per mBtu in September 2009, followed by a slight recovery to today’s price of about $4 per mBtu. In addition, demand in the US for imports of Qatar’s LNG have all but dried up and in the UK previously Qatar’s second largest market demand has dropped as a result of the recession. As a result, Qatar has developed sales to China but the issue is that low gas prices are likely to prevail for the next couple of years depressing investment interest in developing new fields particularly if they are technically challenging such as sour gas or in more remote locations.
What the two articles do show is that the energy market in the Middle East, long home to the principal suppliers of the world, is changing rapidly. Finite reserves are coming up against rising domestic demand and more challenging new field development both technically and financially, which will change the landscape this decade. Although cheap at the moment, natural gas’ lower carbon emission profile will make it the fuel of choice in the decade to come and will put a strain on energy supplies in the Middle East. Middle Eastern states may come to regret the massive investments they have made in energy intensive industries such as aluminum smelting if their domestic market has to start importing natural gas from elsewhere to make up the shortfall.